Auto Loan Calculator: See How Much You Can Afford
When looking for a car loan, it helps to be armed with as much information as possible. It is also wise to factor in car expenses so you know not only what car you can afford to buy, but what car you can afford to drive around for the next few years.
There is a lot of information to keep in mind. The best place to start is with a calculator that can organize that information, factor in variables, and handle the calculations for you.
Auto Loan Calculator
There is much that goes into deciding how much vehicle you can afford. Down payment. Savings. Available monthly cash flow. Potential for increasing your income. Other expenses.
» Learn More: I Can’t Afford My Car Payments – What Are My Options?
Before cranking up the Auto Loan Calculator, gather key information: your monthly income, your expenses, the estimated value of any trade-in or down payment, the available interest rates on car loans, and estimated costs for insurance and maintenance.
Use the information to calculate how much of a car loan you’ll need; what the interest rate will be on the loan; and how long it will take to pay off the loan. Put those numbers in the auto loan calculator and determine if the monthly payment you’ll be making fits in your budget.
Auto Loan Calculator
Current Auto Loan Rates
As of mid-August 2024, we are in a volatile time for interest rates. The high inflation of the previous year prompted the Federal Reserve to hike the prime lending rate several times. Inflation eventually fell to a point where the Fed started lowering rates again.
The Auto Loan Calculator can at least tell you how the current rate will affect your monthly payment amount. That is ultimately how you pay for a new or used car.
How Much Vehicle Can I Afford?
Experts suggest that you should not allocate more than 20% of your take-home pay towards monthly auto payments. The down payment, interest rate, and term of your loan will also determine how much you can afford to buy.
Using the Auto Loan Calculator
It is important to be realistic when entering your information into the boxes provided. It is also worth noting that you can use the calculator tool multiple times, so you can also see what your pie-in-the-sky dream car would cost you.
Since you’ll be buying the car in the real world, use your current information under the heading “Assumptions:”
- Down payment: Includes cash on hand and value of a trade-in. The Kelly Blue Book can help figure your trade-in value.
- Desired monthly payment: Remember the rule of thumb that you should not pay more than 20% of your monthly take-home pay.
- Annual interest rate: Compare advertised loan rates and consider the possibility of lowered rates.
- Term of the loan: This is an often-overlooked cost factor. A 36-month loan will mean higher monthly payments, but a lower overall cost of the car. A 60-month loan is the opposite: lower monthly payments but a higher total cost.
Vehicle Down Payment
This is the amount you will apply toward the purchase price to reduce the amount financed. A down payment can include any combination of cash, trade-in or — when available — a dealer or manufacturer rebate.
Use online sites to help provide an idea of your car’s trade-in value. Regarding the pricing guide, make sure to use the trade-in value and not the retail cost (the dealer’s resale price).
The bigger the down payment, the better off you’ll be, for a number of reasons. Having lots of skin in the game allows you to shop for a better vehicle, lower your monthly payment, or reduce the length of your loan (or all three). A fatter down payment can even lower the interest rate on your loan.
For new cars, the value of which suffers notorious hits the moment they’re driven off the lot, a 20% down payment will prevent you from being “upside-down” — owing more than the car is worth — the instant you take possession.
Pro Tip
Be brutally honest in assessing your vehicle. When in doubt, grade it down. That way you’ll be less dismayed by the report of the dealership’s used-car inspector. If it comes to that, you’ll also be in a better position to argue that the dealership’s appraisal is overly harsh.
Desired Monthly Payment
With serious consideration given to the length of the loan or lease, the desired monthly payment is pretty much the total ballgame. It is the figure the dealership will target. It is the number that will be a fixed point in your financial world for the life of the loan or lease.
Things to consider beyond the monthly check you’ll stroke (or have automatically deducted from your bank account) that are very much part of your auto-owning experience are the costs for insurance, gasoline, maintenance, fees, tolls and parking.
Review your driving record. Are there problems that can be cleaned up? What’s your current coverage? Does it require adjusting?
Annual Interest Rate
As with most loans, your credit score and credit history will influence how low your interest rate will be.
Other factors include the length of the loan (longer terms tend to command higher rates because the lender is at risk for a longer time), the type of lender — bank, credit union, automaker’s financing arm — and whether you’re buying new or used. New cars traditionally can be financed at lower rates.
Term of the Auto Loan
The shorter the length of your vehicle loan, the better for you. Other important factors to consider are the amount you’ll pay in interest on longer-term loans, how long you’ll be paying off your vehicle after its warranty runs out, and, because of depreciation, how long your loan balance will be higher than the value of the car.
Begin by understanding how car loans work. When you buy a car, once you’ve paid off the loan, you own the car. You can trade it in, drive it, pass it down to a new driver, or sell it. On the other hand, the car’s value will be a lot lower than the amount of money you paid over the term of the loan.
Leasing a car involves lower out-of-pocket monthly costs because you aren’t buying anything; you’re simply absorbing the vehicle’s depreciation during the term of the lease, plus interest (or rent) charges, taxes and fees. It’s like renting a car for three years: you have to return it in good condition and then you’re on your own.
Auto Financing Rule of Thumb: 20/4/10 formula
The closest thing to magic sauce is the 20/4/10 formula endorsed by many advisers: 20% down, no longer than a four-year loan term, and total vehicle expenses of 10%. This is prudent, happy-life advice.
Plug those numbers into our calculator, and you will get a good idea of how much vehicle you can maintain.
Factors That Can Affect Car Loan Rates
Interest rates are affected by a number of economic factors. In 2023 and 2024, the Federal Reserve Board raised rates in an attempt to bring inflation down.
Beyond the prime rate – which affects everything – there are factors that affect each individual’s rate for a car loan:
- Credit history: Potential lenders have access to your credit report. A history of responsible management of your debts helps you to obtain future loans.
- Credit score: Your FICO, or credit score, is based on a formula designed to measure your reliability as a borrower.
- Amount of the loan: If your credit score is good enough to buy one car, it may not be high enough to buy a more expensive car.
- Age of the vehicle: Lenders are more willing to lend money to someone buying a new car than to someone buying an older car that has lost a percentage of its original value. The idea is not to write loans that last longer than the lifespan of the vehicle.
Car Loan Calculator FAQ’s
Studies show that better deals are made on weekdays than on weekends, when car dealers tend to be busier. It is also a good idea to seek out sales. Often late-year, holiday sales are ideal because dealerships are trying to move cars from the current model year in order to make space for the next year’s models.
A new car hasn’t been misused or neglected and it hasn’t taken on any wear and tear. But a new car has a higher price, depreciates at a higher rate and costs more to insure. A used car costs less and doesn’t depreciate as quickly. But a used car has been owned and driven by a stranger who may not have maintained it well. Only you can decide whether the price difference is worth the relative reliability.
Recent data shows the average FICO score is 717, which is considered very good on the FICO scale of 300 to 850. Over 70% of American adults had a score of 670 or better, which are considered good. About 21% had scores above 800, which are considered exceptional.
There are several key factors involved in this decision. When you buy a car, you acquire its depreciation, its wear and tear, and its condition once you’ve paid off your loan. A lease is like renting a car for three or four years. You have use of it, but you have limits on total mileage driven and an obligation to return it in good condition. You may be able to get a nicer car at a lower monthly rate, but you will not own that car.
Anyone who uses a credit card understands the cost of that convenience. In effect, making a monthly car payment with a credit card means trading the interest rate on your auto loan for the much higher rate on your credit card. You can, but that doesn’t mean you should.
9 MINUTE READ
Sources:
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